Backup power generators were standing ready when the Marin County Fair opened in June 2001; if an electrical blackout struck, organizers didn't want anyone stranded at the top of the Ferris wheel.

It was a real worry, but it was also an omen: It was during the long, hot and sometimes unusually dark summer of 2001, when residents across California were bracing for more rolling blackouts, that the seeds of the Marin Clean Energy initiative were sown.

Amid the rolling blackouts and chaos that followed deregulation of the state's energy business came legislation that made it possible for cities and counties to buy electricity directly from suppliers and sell it to their residents, so-called community choice aggregation.

"It was right in the middle of the escalation of the crisis, when the rates tripled," said Paul Fenn, a San Francisco energy consultant who wrote the community choice bill, AB 117, which became law in September 2002.

Former Marin state Sen. Carole Migden, who sponsored the legislation, said, "The failure of deregulation and the power shortages created a receptive climate for AB 117."

Blackouts because of shortages of electricity in the summer of 2000 were followed by more power outages in January, March and May 2001. When a rolling blackout hit a Novato Rite Aid store in January, employees escorted customers along the store's aisles with flashlights.

Flash back to 1996

This was not what legislators had envisioned when they approved a different legislation, the Electric Utility Restructuring Act, which became law in 1996.

"People thought it would be like telecom deregulation; we'd have all these choices of suppliers and lots of technological innovation," Fenn said.

The legislation, AB 1890, granted California customers "direct access" to energy suppliers. They were no longer obliged to purchase their power from local utility companies. Fenn said Pacific Gas and Electric Co. played a leading role in helping craft the bill.

"PG&E was proclaiming it a national model at the time," Fenn said. "They were the one issuing press releases when it was adopted. It was their law."

Tom Delaney, account manager at the California Independent System Operator Corp. that oversees the state's complex electrical grid, said, "I was around at the time. I did not see any angst. I saw them (PG&E) fully engaged."

Katie Romans, a spokeswoman for PG&E, agreed. "PG&E, along with other utilities, businesses and consumers in California, as well as the governor and a large majority of the California Legislature, supported AB 1890."

But deregulation would spell trouble for PG&E.

Under deregulation, PG&E and the state's other investor-owned utilities were reimbursed for previous power plant investments and power purchase contracts that were deemed unrecoverable in a competitive market. These payments, which in PG&E's case amounted to some $8 billion, came from consumer charges that were levied in proportion to the amount of electricity the consumer used.

The deregulation legislation encouraged PG&E and the state's other investor-owned utilities to sell most of their power-generating facilities, and they complied, selling all of their fossil fuel plants to the likes of Dynegy and Reliant. The investor-owned utilities, unlike the state's municipal utilities, were prohibited from entering into long-term contracts with energy generators. Later, they had to buy electricity on the spot market at exorbitant prices.

Lawmakers, expecting electricity prices to drop due to competition, had capped rates at the pre-regulation level. As a result, the investor-owned utilities were unable to recoup their expenditures and began to hemorrhage money. The financial chaos combined with a shortage of new power plants, a drought and market manipulation by Enron and other energy suppliers resulted in the rolling blackouts.

PG&E goes bankrupt

In March 2001 the California Public Utilities Commission granted PG&E a 40 percent rate hike in a bid to keep the utility solvent. It failed.

In April 2001, PG&E Co. filed for bankruptcy with $12 billion in debt. Soon after, PG&E sued the PUC for approval to recover $11 billion from customers and sought approval of a post-bankruptcy reorganization that would have curtailed most state regulation of its rates. In September 2001, the PUC basically suspended deregulation, acting to stem an exodus of large industrial customers from the investor-owned utilities.

In January 2002, while the bankruptcy was still wending its way through the courts, California Attorney General Bill Lockyer sued PG&E's parent company, PG&E Corp., asserting that it had illegally transferred between $600 million and $4 billion from the utility to its shareholders and unregulated subsidiaries. The attorney general was seeking to establish that PG&E Corp. had, over time, milked the utility and its assets for the benefit of the holding company.

According to the suit, in 1999 alone PG&E Co. paid its holding company $278 million more in cash to cover its obligations for income taxes than was paid by the holding company in taxes that year. Former California Supreme Court Joseph Grodin, called in as a neutral evaluator, would eventually conclude the state attorney general's office had failed in its "burden of proving a violation." After Grodin's decision, all parties requested that the complaint be dismissed with prejudice, meaning that the complaint could not be refiled.

In December 2003, the PUC approved a bankruptcy plan that required PG&E's customers to pay the company $7 billion to $8 billion over nine years. PG&E's shareholders were required to contribute $2 billion in lost dividends. The plan also resulted in a substantial rate cut. Industrial customers and other large users saw the biggest reductions in their bills.

Deregulation, which was supposed to have given ratepayers the freedom to choose their own energy supplier, ended with them once more captives of the investor-owned utilities - and in the case of PG&E's customers, required them to help pay off the utility's debts.

Community choice aggregation

Amid the state battles with PG&E, rolling blackouts and uncertainty in the energy industry came Migden's community choice aggregation legislation, allowing municipalities to buy electricity directly from suppliers and sell it to their residents. It was viewed by many as a way of once again offering customers a choice, albeit under more controlled conditions.

Fenn said policymakers learned from the deregulation fiasco "that this whole single customer-based competition idea had not worked out and that regional aggregation was needed to provide a real alternative to monopoly service."

PG&E made no effort to stop the community choice bill from passing in 2002 and would have faced an uphill battle had it wanted to - it was at a low ebb both financially and politically, Fenn said.

Among those who voted for the community choice law was then-Assemblyman Joe Nation of Marin, who is now working as a paid lobbyist for PG&E opposing the Marin Clean Energy initiative.

Nation said AB 117 sprang "from a desire after the energy crisis to let local governments have more of a voice, to give them alternatives."

Nation said he still supports community choice aggregation in concept - just not the Marin Clean Energy initiative.

"There is a difference between conceptual support for providing authority and actually approving of a plan," he said.

The ISO's Delaney said the legislators who voted for community choice may also have been swayed by the success of the approach in other states, such as Ohio.

"This is not a theory," Delaney said. "It's not a bunch of well-intended economists or Ph.D.'s thinking that this will work on the head of a needle. It's something that's there, and it's working quite well. So why not go with something that works."